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Honeywell: Decline in tax boosts profits

Feb 22, 2012

Honeywell Automation India Ltd (HAIL) has announced the fourth quarter and full year results of financial year 2011. The company has reported 31.8% YoY and 31.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

Top line increased by 31.8% YoY during 4QCY11. For the full year the company reported topline growth of about 19.0% YoY.

Increase in other income and decline in tax expenses boosted profitability growth.

The company recommended a dividend of Rs 10 per equity share for the fiscal year ended 2011.

Consolidated financial snapshot

(Rs m)

4QCY10

4QCY11

Change

CY10

CY11

Change

Sales

3,804

5,012

31.8%

13547

16125

19.0%

Other operating income

4

18

356.4%

11

66

507.4%

Expenditure

3,354

4,573

36.3%

12118.8

14680

21.1%

Operating profit (EBDITA)

454

457

0.7%

1,439

1,511

5.0%

Operating profit margin (%)

11.9%

9.1%

10.6%

9.3%

Other income

22

25

13.4%

80

103

29.2%

Interest

-

3

1

9

962.5%

Depreciation

36

38

3.8%

129

148

14.8%

Profit before tax

439.1

441.00

0.4%

1389.0

1457.0

4.9%

Tax

182

103

-43.6%

339

386

13.9%

Profit after tax/(loss)

257.4

338.50

31.5%

1050.5

1071.4

2.0%

Net profit margin (%)

6.8%

6.7%

7.7%

6.6%

No. of shares (m)

8.8

Basic earnings per share (Rs)

121.2

P/E ratio (x) *

20.4

* On a trailing 12-months basis

What has driven performance in 4QCY11?

Net sales increased 31.8% YoY in 4QCY11 (Company has only one segment automation & control and hence clear demarcation of revenues is not provided).

Operating profits grow 0.7% YoY with margins registering a fall of 280 bps in 4QCY11. Increase in overall expenditure as a percentage of sales resulted in margin erosion. Total expenditure as a percentage of sales increased from 88.2% in 4QCY10 to 91.2% in 4QCY11.

Due to lower taxes and increase in other income, bottom line increased 31.5% YoY.

What to expect?

At the current price of Rs 2,439, the stock trades at 20.4 times its trailing twelve month earnings. While the company is delivering on the top-line front, profitability growth has come under significant pressure (during the quarter and year) due to increase in operating expenses. However, we expect the situation to gradually improve in the future.

Further, we believe that the company can also turn out to be a good de-listing play. As per Securities and Exchange Board of India (SEBI) norms, companies should have a minimum public float of 25% by June 2013. Right now, the parent company, Honeywell International owns about 81% in the Indian subsidiary. So by June 2013 the promoters will have to either dilute their stake to adhere to the listing norms or opt for a delisting. We believe that the probability of delisting is high as India is a secondary market for Honeywell Ltd (The parent is already listed in USA, its primary market). So, if delisted, the stock could fetch a healthy premium for the minority shareholders. Based on a high delisting probability and future growth prospects, we maintain our positive view on the stock.

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